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Questions and Answers
What characterizes a perfectly inelastic demand curve?
What characterizes a perfectly inelastic demand curve?
What is the effect of a decrease in price on total expenditure in the elastic part of the demand curve?
What is the effect of a decrease in price on total expenditure in the elastic part of the demand curve?
What is the effect of a decrease in price on total expenditure at the unit elastic point?
What is the effect of a decrease in price on total expenditure at the unit elastic point?
What is the effect of a decrease in price on total expenditure in the inelastic part of the demand curve?
What is the effect of a decrease in price on total expenditure in the inelastic part of the demand curve?
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What is likely to increase the elasticity of demand for a product?
What is likely to increase the elasticity of demand for a product?
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What happens to the elasticity of demand when the product represents a high percentage of the budget?
What happens to the elasticity of demand when the product represents a high percentage of the budget?
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What happens to the elasticity of demand when the time horizon is long?
What happens to the elasticity of demand when the time horizon is long?
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What happens to the elasticity of demand when the product is discretionary?
What happens to the elasticity of demand when the product is discretionary?
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What is the definition of total expenditure?
What is the definition of total expenditure?
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What is the shape of a perfectly elastic demand curve?
What is the shape of a perfectly elastic demand curve?
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What are the two broad areas of economics?
What are the two broad areas of economics?
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What happens to the demand for a good when its price increases, ceteris paribus?
What happens to the demand for a good when its price increases, ceteris paribus?
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What is the main purpose of a demand function?
What is the main purpose of a demand function?
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What is the formula for the price elasticity of demand?
What is the formula for the price elasticity of demand?
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What is the value of the price elasticity of demand at point A on the demand curve?
What is the value of the price elasticity of demand at point A on the demand curve?
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What is the characteristic of a unit elastic demand?
What is the characteristic of a unit elastic demand?
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What happens to the elasticity of demand as you move down a negatively sloped linear demand curve?
What happens to the elasticity of demand as you move down a negatively sloped linear demand curve?
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What is the characteristic of an elastic demand?
What is the characteristic of an elastic demand?
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What is the value of the price elasticity of demand at point C on the demand curve?
What is the value of the price elasticity of demand at point C on the demand curve?
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What is the purpose of the inverse demand function?
What is the purpose of the inverse demand function?
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Study Notes
Introduction to Economics and Demand Analysis
- Economics is the study of production, distribution, and consumption, divided into two broad areas: microeconomics and macroeconomics.
- Microeconomics deals with individual economic units, including consumers and firms.
Demand Analysis
Law of Demand
- As the price of a good rises, buyers will choose to buy less of it (ceteris paribus).
- Conversely, as the price falls, buyers will buy more.
Demand Function
- The demand function expresses the demand for a particular good as a function of multiple variables.
- Key variables influencing demand include the price of the good, income levels, and the prices of other goods.
Example: Demand for Chairs
- Demand function: Q = 10 - 0.5P + 0.06I - 0.01Pt
- Q: quantity of chairs demanded
- P: own price of chairs
- I: average income level
- Pt: average price of tables
Inverse Demand Function
- Can be expressed as: P = 200 - 2Q
- Plotted on a graph, the demand curve shows the highest quantity consumers are willing to purchase at each price.
Elasticity of Demand
- Measures how the quantity of a good demanded responds to changes in its own price, holding other factors constant.
- Formula: ε = (ΔQ/Q) / (ΔP/P)
- For the example demand function, ε = -0.5(P/Q)
Linear Demand Curve
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Elasticity varies depending on where it is calculated on the curve.
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Example: ε = -0.5(P/Q) at different points on the demand curve:
- Point A: ε = -99 (very elastic)
- Point B: ε = -1 (unit elastic)
- Point C: ε = ? (infinite elasticity)### Elasticity of Demand
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Elasticity of demand varies along a negatively sloped linear demand curve.
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It is high at higher prices and low at lower prices.
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At a certain point (unit elastic point), a 1% change in price causes a 1% change in quantity.
Types of Elasticity
- Unit elastic: a 1% change in price causes a 1% change in quantity.
- Elastic: a small change in price causes a large change in quantity.
- Inelastic: a large change in price causes a small change in quantity.
Perfectly Elastic and Inelastic Demand Curves
- Perfectly elastic demand curve: horizontal, a small change in price has a huge impact on quantity.
- Perfectly inelastic demand curve: vertical, a change in price has no impact on quantity.
Factors Affecting Demand Elasticity
- Availability of close substitutes: if there are several close substitutes, elasticity is high.
- Broadness of product definition: if the product is broadly defined, substitutes may not be close.
- Portion of total budget: if the product represents a high percentage of the budget, elasticity is high.
- Time horizon: if the time horizon is long, elasticity is high.
- Discretionary or non-discretionary nature of the product: if the product is discretionary, elasticity is high.
Relationship between Elasticity and Total Expenditure
- Total expenditure is the total amount a consumer spends on a product (price x quantity).
- In the elastic part of the demand curve, a decrease in price leads to an increase in total expenditure.
- At the unit elastic point, a decrease in price does not change total expenditure.
- In the inelastic part of the demand curve, a decrease in price leads to a decrease in total expenditure.
Introduction to Economics and Demand Analysis
- Economics is divided into two broad areas: microeconomics and macroeconomics.
Demand Analysis
Law of Demand
- As the price of a good rises, buyers will choose to buy less of it (ceteris paribus).
- Conversely, as the price falls, buyers will buy more.
Demand Function
- The demand function expresses the demand for a particular good as a function of multiple variables.
- Key variables influencing demand include the price of the good, income levels, and the prices of other goods.
Example: Demand for Chairs
- Demand function: Q = 10 - 0.5P + 0.06I - 0.01Pt
- Q: quantity of chairs demanded
- P: own price of chairs
- I: average income level
- Pt: average price of tables
Inverse Demand Function
- Can be expressed as: P = 200 - 2Q
- Plotted on a graph, the demand curve shows the highest quantity consumers are willing to purchase at each price.
Elasticity of Demand
- Measures how the quantity of a good demanded responds to changes in its own price, holding other factors constant.
- Formula: ε = (ΔQ/Q) / (ΔP/P)
- For the example demand function, ε = -0.5(P/Q)
Elasticity of Demand Curve
- Elasticity varies depending on where it is calculated on the curve.
- Elasticity is high at higher prices and low at lower prices.
Types of Elasticity
- Unit elastic: a 1% change in price causes a 1% change in quantity.
- Elastic: a small change in price causes a large change in quantity.
- Inelastic: a large change in price causes a small change in quantity.
Perfectly Elastic and Inelastic Demand Curves
- Perfectly elastic demand curve: horizontal, a small change in price has a huge impact on quantity.
- Perfectly inelastic demand curve: vertical, a change in price has no impact on quantity.
Factors Affecting Demand Elasticity
- Availability of close substitutes: if there are several close substitutes, elasticity is high.
- Broadness of product definition: if the product is broadly defined, substitutes may not be close.
- Portion of total budget: if the product represents a high percentage of the budget, elasticity is high.
- Time horizon: if the time horizon is long, elasticity is high.
- Discretionary or non-discretionary nature of the product: if the product is discretionary, elasticity is high.
Relationship between Elasticity and Total Expenditure
- Total expenditure is the total amount a consumer spends on a product (price x quantity).
- In the elastic part of the demand curve, a decrease in price leads to an increase in total expenditure.
- At the unit elastic point, a decrease in price does not change total expenditure.
- In the inelastic part of the demand curve, a decrease in price leads to a decrease in total expenditure.
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Description
This quiz covers the basics of economics, including microeconomics and macroeconomics, and delves into demand analysis, discussing the law of demand and demand functions.
